Reset Your Password

Bank of Canada increases overnight rate target to 1%

Bank of Canada increases overnight rate target to 1%

The Bank of Canada today announced that it is raising its target for the overnight rate by one-quarter of one percentage point to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

The global economic recovery is proceeding but remains uneven, balancing strong activity in emerging market economies with weak growth in some advanced economies. In the United States, the recovery in private demand is being held back by high unemployment and recent indicators suggest a more muted recovery in the near term.

Economic activity in Canada was slightly softer in the second quarter than the Bank had expected, although consumption and investment have evolved largely as anticipated. Going forward, consumption growth is expected to remain solid and business investment to rise strongly. Both are being supported by accommodative credit conditions, which have eased in recent weeks mainly owing to sharp declines in global bond yields.

The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity. Inflation in Canada has been broadly in line with the Bank's expectations and its dynamics are essentially unchanged.

Against this backdrop, the Bank decided to increase its target for the overnight rate to 1 per cent. As a result of monetary policy measures taken since April, financial conditions in Canada have tightened modestly but remain exceptionally stimulative. This is consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada.

Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.

What does Mortgage Brokers Ottawa recommend?

Bank of Canada announced that there are increasing the overnight prime rate by ¼% today bringing the Major Banks Prime Rate up to 3.00%. So what does this mean for customers who are sitting with a Variable Rate Mortgage?? Is it time to lock in to a fixed rate mortgage??

Here is what some of the senior economists from major banks are saying:

Much doubt remains about the health of the United States. The Bank of Canada's economic outlook, released just two months ago, now appears too optimistic given recent trends. It expected the economy to reach its full potential late next year, but that could be pushed out further with weaker economic indicators in the United States and Canada. Plus, recent data suggest inflation, which ultimately drives the bank's rate decisions, poses no threat as the key core rate - which strips out volatile-priced items - has slowed for two straight months.

These factors are driving analysts to scale back expectations for rate hikes for the remainder of 2010 and into 2011, predicting the Bank of Canada will pause for a while to see where all the economic dust settles. For instance, Bank of Nova Scotia chief economist Warren Jestin now envisages the central bank moving its benchmark rate no higher than 1.75% next year, or 50 basis points below previous forecasts.

Last week's U.S. data may have put to rest fears of a double-dip recession, "but we are also tracking a U.S. economy that is nowhere near the pace it needs to be at this stage of the business cycle," said Avery Shenfeld, chief economist at CIBC World Markets. The United States still requires "easy monetary policy and a softening in next year's planned fiscal tightening if it is going to stay out of trouble."

Even with positive jobs and manufacturing data, the week ended with a bit of a reality check for the U.S. economy with figures showing growth slowing in the service sector, which accounts for 80% of U.S. output.

The U.S. Federal Reserve is expected to refrain from rate hikes for a while - well into 2011, according to most analysts - with the U.S. economy still in a lacklustre state. The Bank of Canada, then, won't want to raise rates too aggressively ahead of the Fed or risk the Canadian dollar appreciating to levels that start to take a bite out of economic output.

In fact, speculation is that the Fed would inject further liquidity, through another round of securities purchases, before considering a rate hike. But senior Fed policymakers remain divided on that need, with Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, describing fears of deflation and a double-dip recession as "alarmist."

In addition, Mr. Lockhart said that, despite all the worry, the U.S. economy remained on a "gradual recovery track."

Based on this data, Mortgage Brokers Ottawa still feels like the Variable Rate Mortgage continues to be a wise choice!!

For customers who currently have a Variable Rate Mortgage priced at Prime Minus, we recommend that you either continue with status quo or if you can, increase your payments and have the extra go towards your principle.

For customers who took out Variable Rate Mortgages last year when they were priced at Prime Plus, I think it would be wise to contact your existing Mortgage Brokers Ottawa agent and see if paying the 3 month interest penalty is worthwhile in securing a new Variable Rate Mortgage at today's rates of between Prime Minus .60% and .70% depending on the lender/bank.

As always, a Variable Rate Mortgage always gives you the option to convert it to a Fixed Rate and if you are interested in locking in, today's rates range from 3.79% to 3.99% for a 5 year fixed and again the rate is determined by the financial institution who holds your current mortgage.

Century 21 Canada Limited Partnership currently has franchise opportunities available in select markets across Canada. The intent of this communication is for informational purposes only and is not intended to be a solicitation to anyone under contract with another real estate brokerage organization. CENTURY 21® is a registered trademark owned by Century 21 Real Estate LLC, used under license.
Each office is independently owned and operated. ®(™) Registered trademarks of Century 21 Real Estate LLC used under license.

The trademarks MLS®, Multiple Listing Service® and the associated logos identify professional services rendered by REALTOR® members of CREA to effect the purchase, sale and lease of real estate as part of a cooperative selling system. The trademarks REALTOR®, REALTORS® and the REALTOR® logo are controlled by The Canadian Real Estate Association (CREA) and identify real estate professionals who are members of CREA.